ESSA Roundup

The revised version of the original Paulson plan is expected to gain passage in the House later today but it's not out the woods yet. Both Democrat and Republican members of the House had to make concessions.

All sides had to surrender something. The administration had to accept limits on executive pay and tougher oversight; Democrats had to sacrifice a push to allow bankruptcy judges to rewrite mortgages; and Republicans fell short in their effort to require that the federal government insure, rather than buy, the bad debt.

One thing that appears to be new is what the consequences will be if the plan loses money after five years. The Treasury will recoup its losses by directly taxing the financial sector if after five years the plan is a net loss.

The final version of the bill included a deal-sealing plan for eventually recouping losses; if the Treasury program to purchase and resell troubled mortgage-backed securities has lost money after five years, the president must submit a plan to Congress to recover those losses from the financial industry. Presumably that plan would involve new fees or taxes, perhaps on securities transactions.

Calculated Risk discusses other changes, such as the suspension of mark-to-market accounting, allowing banks to earn interest and maintain a "zero reserve ratio", and market transparency. That is,

SEC. 114. MARKET TRANSPARENCY.
(a) PRICING.—To facilitate market transparency, the Secretary shall make available to the public, in electronic form, a description, amounts, and pricing of assets acquired under this Act, within 2 business days of purchase, trade, or other disposition.

(b) DISCLOSURE.—For each type of financial institutions that is authorized to use the program established under this Act, the Secretary shall determine whether the public disclosure required for such financial institutions with respect to off-balance sheet transactions, derivatives instruments, contingent liabilities, and similar sources of potential exposure is adequate to provide to the public sufficient information as to the true financial position of the institutions. If such disclosure is not adequate for that purpose, the Secretary shall make recommendations for additional disclosure requirements to the relevant regulators.

So all of these transactions will be available for all to see, which is good.

The Congressional Budget Office analyzes the Emergency Economic Stabilization Act of 2008 (ESSA). Here, too, is Becker's thoughts: “… While I find helping these banks highly distasteful, moral hazard concerns should be put aside temporarily when the whole short term credit system is close to a complete collapse…” This is a view I think most people share, including me. When you're on a sinking ship, I think your main priority should be getting out alive, not polishing the brass (which is personally how I took the Newt Gingrich quote).

James Hamilton (UC-San Diego) over at Econbrowser shows how gross domestic income (GDI), versus gross domestic product (GDP), reveals we are currently in a recession. Even though theoretically the two measures are equivalent (since all production is income), when different data sources are used to calculate those numbers, they are always different, and the difference is attributed to just statistical discrepancy. Federal Reserve economist, Jeremy Nalewaik (nice profile pic, btw - similar to the one in our office collage of faculty pictures. Ties are for l0zerz!) says that GDI may be preferable for determining the timing of recessions, and produces a probability index similar to Hamilton's own recession probability index (which is based on GDP). His calculations show a recession starting late last year (Q4). This solves at least some of the discrepancies that have been puzzling to people following this - employment and income data consistently have been falling, whereas GDP numbers have been strong. Why? Not sure if this is an answer, but GDP has been strong in part due to the depreciation of the dollar pushing up exports even while residential construction has fallen off by a lot. Why that would explain income/production differences though is beyond me since domestic producers selling goods to foreigners would have more income. Still, point is, that statistical discrepancy could be masking the timing of the recession, which makes sense since the employment data has been sharply negative all year, and unemployment now stands at 6.1%, and has a fairly steep positive slope month-to-month suggesting it may keep rising, and possibly at the same rate (it was at 5.7% in July, and 5.0% back in April).

Here's what Hamilton says about that, if it's the case.

There's an important implication of this for the ongoing discussion of the current financial turmoil. The U.S. is currently in a recession, and events of the last two weeks are sure to make things worse for the next few months, even if we had some policy to bring immediate stability to financial markets. That is water under the bridge at this point.

Too little, too late maybe the conclusion we can draw if the economy slipped into the recession in Q4:2007. As the colonies on Battlestar Galatica say, all of this has happened and will happen again. We should all be bracing ourselves. This may be the worst economic situation we all find ourselves in. I am especially nervous, seeing as how I'm tenure-track but not tenured.